The Supply of Labour
The Supply of Labour
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Supply of labour is depicted by an upward sloping supply curve and is the number of workers available and willing to work at any given wage.
Factors influencing the Supply of Labour
- Wage rate – if the given wage rate is higher, more people would want to work, hence a greater supply of labour
- Quality of education / training – a larger poor of people gaining access to education, providing them the opportunity to be a ‘worker’
- Opportunity cost of leisure – a choice between working more (to earn a higher wage) and working less (more leisure)
- Migration – migrants are usually from economies which have a wage rate lower than the average UK wage rate, hence migration affects the supply of labour most at lower wage rates
- Trade Unions – workers’ employment rights will be protected, encouraging them to enter the labour market and increasing the supply of workers
- Demographics of the population – the supply of labour increases as more people become available and willing to work
Substitution Effect of a rise in wages
- Causes more hours to be worked as wages increase
- A higher wage rate will incentivise workers to work more instead of enjoy leisure time, creating a higher opportunity cost of not working
Income Effect of a rise in wages
- Workers are able to receive higher wages even by working fewer hours, so work less as their target income can be achieved in a smaller time
Market Failure in the Labour Market
- Occupational Immobility – workers experience difficulty in moving from one job to another due to the lack of transferable skills they have
- Geographical Immobility – workers experience difficulty in moving from one job to another due to the cost of movement and new location
Immobility suggests that the supply of labour and demand for labour is not equal. There is an excess supply for one job and excess demand for another.
Policies to improve the Mobility of Labour
Reducing Occupational Mobility
- Training Schemes – investment into training schemes can boost human capital and equip them with new transferable skills, making them more employable when switching from one industry to another
- Vocational Training – increasing the skill levels by subsiding the provision of vocational training by the private sector
Reducing Geographical Mobility
- Subsidies – provide subsidies for those moving into an area where there are shortages of labour
- Housing Market – reformations in the housing market can reduce the price of rented properties and increase the supply of affordable properties
OCR Spec – Additional Content
Factors which contribute to imperfections in a labour market
Monopsony Power
When there is only one buyer in the market, it means the firm has the ability to set wages.
Employees are likely to experience lower wages if the firm possessing monopsony power chooses to set a low wage – this could result in demotivation and lower productivity.
Trade Union Power
The labour market is likely to be more flexible if trade unions are pushing for higher wages.
Trade Unions can increase job security and counter-act any monopsony power as they know their employment rights will be protected
However if trade unions engage in several strikes, this may cause some employees to leave the labour market
Bilateral Monopoly
This refers to only one buyer and one supplier existing in the market
Imperfect Information
Some qualified workers may not be aware of other higher paying jobs in the market. Other workers may not know the importance of long-term investment into improving their skillsets.
This can make the market inefficient as it can limit the progression of workers
Quick Fire Questions – Knowledge Check
1. Define ‘Supply of Labour’ (2 marks)
2. Identify and explain five factors affecting the Supply of Labour (10 marks)
3. Explain the Substitution effect of a rise in wages (3 marks)
4. Explain the Income effect of a rise in wages (3 marks)
5. Explain how market failure in Labour Markets may occur (4 marks)
6. Define ‘Immobility’ (2 marks)
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